Altana Corporate Bond Fund UCITS
Altana Corporate Bond Fund UCITS Monthly Performance Report Share Class/ Bloomberg ID
€ / ALTCBAE ID
$ / ALTCBOU ID
£ / ALTCBCG ID
November 2017
-0.45%
-0.29%
-0.38%
YTD
+3.22%
+5.00%
+3.90%
Portfolio Manager & Chief Investment Officer: Lee Robinson
Joint - Portfolio Manager: Philip Crate
NAV (since inception): € 97.71
Fund AUM: € 32,681,881
Fund Strategy The objective of the Altana Corporate Bonds Fund (ACBF) is to generate a positive return in all market phases by investing in a diversified portfolio of corporate bonds globally. The fund sources attractive bond investment opportunities in all major markets, seeks corporations that have an extremely high degree of repayment as well as strong defendable business models. Risks on macroeconomic, geopolitical, sector and issuer levels are limited by following a structured allocation strategy. ACBF takes global exposure either via cash bond positions or derivatives, depending on relative valuations and market opportunities.
As of end of November 2017
Annualised returns 3M YTD 1Y
1M ACBF Strategy
Volatility 1Y ITD
ITD
Sortino
Sharpe Ratio 1Y ITD
Ratio
1Y
(€ class)
-0.45%
0.90%
3.22%
3.54%
1.91%
1.59%
4.42%
2.23
0.43
3.45
HF Credit Index BAML Global IG
-0.25%
0.38%
3.23%
3.57%
1.54%
1.67%
2.43%
2.14
0.64
3.68
-0.10%
0.28%
4.67%
5.47%
3.54%
2.46%
2.94%
2.22
1.20
4.01
ACBF (since management restructuring) vs. benchmarks 1.12 1.11 1.10 1.09 1.08 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1.00 0.99 0.98 0.97 0.96 Jan/16
Return (source: Bloomberg) Per
Mar/16
May/16
Jul/16
Sep/16
Nov/16
Altana Corporate Bonds Fund UCITS
Jan/17
Mar/17
May/17
HF Credit Index
Jul/17
Sep/17
Nov/17
BAML Global Investment Grade Index
Fund
Percentile
1 Mo
-0.48
32%
3 Mo
0.65
72%
YTD
3.27
86%
1Yr
4.18
84%
3Yr
2.02
85%
5Yr
-
-
5.65
82%
2016
Please refer to Appendix I – Strategy performance graph and risk report since fund inception
Performance (net*) Jan
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
YTD
Return Since Inception
Mar
Apr
-0.19% +0.47%
+0.75%
+1.64%
+0.04% -2.12% +1.71% +0.67% +1.11% +2.37% +0.71% +1.29% +8.68%
2014
-0.25% +1.43%
+1.74%
+0.63%
+2.32% +1.08% -2.94% +0.08% -7.09% -1.65% -0.35% +0.78% -4.20%
2015
+1.21% +4.50%
+0.58%
+2.88%
2016
+0.06% -0.78%
+1.62%
+0.25%
+1.29% -1.98% -2.89% -0.98% -3.66% +1.27% -2.98% -1.75% -2.82% +10.00% +0.12% -0.32% +1.39% +0.89% -0.38% +0.80% +0.95% +0.93% +5.65%
2017
+0.01% +0.44%
-0.19%
+0.83%
+0.88% -0.41% +0.58% +0.19% +0.42% +0.88% -0.45%
2013
Feb
+3.22%
*Performance (% m/m) is net € of all legal, admin, trading and management fees. Latest month/YTD figures are final figures. Data is for ACBF Cayman up to April 2014, as of May 2014 data is for ACBF UCITS. 2014 YTD return is a blended figure between ACBF Cayman and ACBF UCITS. ACBF UCITS May-Dec 2014 return was -7.80%.
Main Performance Contributors Top Performers
Bps
Worst Performers
Bps
1
GSL 9.875 11/15/22 144A
+8
1
TALKLN 5.375 01/15/22
-7
2
RIG 6.375 12/15/21
+5
2
SHODFP 7.75 11/15/22 REGS
-6
3
AAFFP 0 10/01/23 REGS
+3
3
FTR 9.25 07/01/21
-6
4
BBDBCN 4.75 04/15/19 REGS
+3
4
S 7.25 09/15/21
-5
5
ABGSM 1.5 03/31/23 REGS
+2
5
BOPRLN 5.25 07/15/19 REGS
-5
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles| Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 1
Portfolio Activity & Outlook Performance Review Welcome to the final newsletter for 2017! November was a tricky month for credit investors to navigate and this is reflected in our performance. The Altana Corporate Bond Fund (“ACBF”) generated a negative performance (net of fees) of -45bps in November (USD$ and GBP share class net returns of -0.29% and -0.38%, respectively), which is broadly in line with our peers and with the negative returns reported for the broader BAML credit indices (when adjusted for fees). ACBF YTD is +3.22% (USD$ and GBP share class net returns of +5.00% and +3.90%, respectively). We are pleased to report that ACBF remains in the top 15% of performers YTD and over a 3-year period according to recent Bloomberg data (up to 4 December 2017). While November was a much more mixed month performance-wise for risk assets, it will likely be best remembered for the S&P 500 delivering a 13th consecutive month of positive total returns which puts it at the longest streak ever. Indeed it has now eclipsed the runs of 12 months seen in 1935-36 and 1949-50. The index ended the month +3.1% which is actually the third strongest month in this record breaking run. With it also positive every month in 2017 it now has the opportunity to finish a calendar year for the first time ever with a positive return every month should we see more of the same in December. A late month surge for US financials (+3.5%) seemingly around positive tax reform progress and possible looser regulation was a large contributor to the broader index performance and overshadowed a more volatile month for tech stocks in particular which appeared to suffer from some profit taking and sector rotation. European equity markets were down in local currency terms, albeit slightly positive in USD terms as a result of the stronger Euro (+2.2%). Some of the notable moves include the DAX (-1.6%, +0.6%), Stoxx 600 (-2.0%, +0.2%) and FTSE MIB (-1.6%, +0.5%). Elsewhere, US government bond returns during the month were fairly muted (+0.1%) while European government bond markets were generally flat in local currency terms and up low single digits in USD terms. This included Bunds (-0.1%, +2.1%), Gilts (+0.3%, +2.1%) and BTPs (+0.6%, +2.8%). Credit markets were similarly muted although this included a ‘mini’ sell-off for HY midway through the month. Figure 1: Total Return Performance of Major Global Financial Assets – November 2017 (local currency)
Source: Deutsche Bank, Bloomberg Finance LP, Markit
The sell-off in European single-B names and for the Crossover CDS index was triggered by a gap down in French telecom’s conglomerate Altice bond price (down c.5-8 points across USD and EUR) and by a dramatic 40 point fall in bond price for Astaldi, an Italian construction company – we don’t hold either name in the portfolio. Telecom names also contributed to weakness in US HY lower too following the negative price action for Altice, Frontier Communications, and Sprint. The latter’s bond price fell on average by c.4 points following the breakdown of its merger talks with TMUS (more detail below). However, it didn’t take long for the market to recoup most of these losses and HY finished the month down around -40bps compared with an intra-month low of c.-85bps. Overall, DM investment grade credit finished the month down around -30bps, with Europe underperforming slightly given the negative return seen for Bunds. We selectively reduced single-B risk and the portfolio’s beta over the course of the month. Market Outlook We remain constructive towards European credit going into 2018 given the continued support afforded by the ECB’s Corporate Sector Purchase Programme (“CSPP”) and by an improving European economic outlook. Credit valuations should also be supported by a low default rate. With fundamentals remaining in good shape and continued support for fixed income from central banks it has not been surprising that default rates have remained (and will continue to remain) historically low. In Figure 2, we show the relationship between lending standards and default rates for both Europe and the US. It can be observed that defaults tend to react to changes in lending standards with around a four quarter lag. Looking at the recent lending standards data it seems likely that default rates will remain low for another year given the easing bias over the past year or so. This should be supportive for valuations, especially lower down the credit spectrum. At this stage of the cycle we prefer to be long credit rather than duration.
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 2
Figure 2: European (LHS) and US (RHS) Lending Standards vs. Default Rates
Source: Deutsche Bank, ECB, Federal Reserve, S&P
A more negative risk view comes from the US yield curve. At the moment the Fed dots price in three 25bp rate rises for 2018 even if the market prices in only 40bps. At the end of October 2015, two months before the first US rate hike in over 9 years, US 2 year yields were around 0.60%. Since then both Fed Funds and 2 year yields have risen around 100bps to 1.35% and 1.80% respectively. Meanwhile 10 year Treasuries are only around 25bps higher leaving the 2s10s curve flattening from around 145bps to c.53bps today. Obviously the yield curve is influenced by many variables but if the Fed did hike three times in 2018 (plus 25bps in December 2017) and the relationship held from the last 2-years of this Fed hiking cycle then we could see 2-year yields up 75-100ps with 10-years only around 20-25bps higher. As such the 2s10s yield curve could end up being closer to flat by YE2018 under a reasonable scenario. If the market saw the Fed making a policy mistake (rightly or wrongly) or if global fixed income demand still held back 10-year yields from rising in their normal cyclical manner then it’s not impossible to envisage a slightly more aggressive scenario where the yield curve inverts in 2018. The reason we would be concerned is that we still think that the yield curve is a good predictor of animal spirits and the business/asset price cycle. We still think that a flat yield curve would leave investors more reluctant to invest in carry trades as the risk/reward becomes less and less compelling. At the moment in a low yield world there is enough of a positive slope on global yield curves for carry to still be attractive. However the 2s10s curve in the US is already more than c.70bps flatter than the local peak in the early days of the Trump Presidency and c.200bps flatter than it was at the start of 2014. We don’t have as much ‘wiggle room’ for the curve to flatten further before concerns mount and therefore there is more risk of a Fed policy error. Figure 3: US 2s10s slope and recessions shaded
Source: Deutsche Bank, Bloomberg Finance LP
So what does this all mean for credit markets? In the near-term we actually think credit spreads could tighten as crosswinds look light in Q1 and the recent widening entices investors back into credit despite relatively tight valuations. Q1 will likely also see evidence that CSPP hasn’t been tapered much relative to PSPP. As such this could mark a fresh round of optimism about the technicals in European credit and hence Q1 could mark the best point of the credit cycle in the absence of external shocks (e.g., the US yield curve flattens (or indeed invert) over a perceived policy error by the Fed or by concern about a more severe Chinese economic slowdown). We believe that the market may start to become more challenging entering Q2, as we leave the perfect scenario of non-inflationary growth and high central bank support behind us. We’ll also likely start to see markets price in the end to the various ECB programmes as Q2 progresses. With yields as low as they are and with credit spreads towards the tighter end of their historic range, next year’s total return expectations for European credit next is relatively low, with most investment banks projecting nothing more than a “coupon clipping” year for HY (total return of c.2.5%). Meanwhile, European IG is expected to generate a flat to slightly negative total return based on the less than stellar return expectations for Bunds in 2018 (estimated total return of -1% and -2.8% for 5 and 10-year, respectively). While valuations for IG seem optically less stretched compared to HY, we are becoming more watchful of higher investment and M&A driven supply given the improvement in economic growth. This could mean less supportive technicals for European IG in the coming year after another year of muted net supply thanks to ECB purchases. Not the most exciting return outlook, we agree. However, we believe that smaller funds like ACBF with strong credit and tactical trading skills stand to benefit from any increase in volatility in the year ahead. Now let’s return to one of the major themes for credit markets in 2018; namely the contraction in central bank balance sheets. In Figure
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 3
4 we show the rolling 12 month central bank balance sheet size from the big four DM central banks over the last few years and likely path over the next two. Figure 4: Rolling 12 month balance sheet changes from the big 4 central banks
Source: Deutsche Bank, Haver, ECB, Federal Reserve, Bank of Japan, Bank of England
The combined size of the Fed, ECB, BoJ and BoE balance sheets has expanded to around $14.9trn which represents an increase of $1.8trn relative to the end of 2016. However, looking forward it’s almost certain that 2018 will represent a changing of the guard for ultra-easy policy. As of October 2017 the Fed has begun (albeit gradually) the process of unwinding its balance sheet, the ECB has announced that it will further taper the growth of its balance sheet in January (although the impact of reinvestments will somewhat buffer this move), the BoE recently raised its benchmark interest rate for the first time in a decade and the BoJ is purchasing less now given its focus on controlling the yield curve rather than targeting a set monthly amount. Assuming fairly neutral and consensus assumptions, central bank balance sheet growth will fall sharply over the next 12-24 months from the peak levels currently seen. Meanwhile we think the risks to inflation are on the upside. A combination of the two will likely mean that crosswinds pick up as we move through Q2 and into H2 – a period where US inflation might start to more consistently beat on the upside (or at least not consistently miss on the downside) and markets start to think about a June ECB meeting where the end of Euro QE is possibly announced. How will ACBF respond to these upcoming challenges? We will continue to focus on short duration secondary opportunities where there is a positive near term catalyst. We will also increase exposure towards short-dated US and EM IG credit given its relatively more attractive risk/return compared to European IG and single-B credit. The fund will remain conservatively positioned towards € IG duration exposure given unattractive break-yields. Figure 5 highlights the very small margin of error for € IG credit: on average credit spreads and/or benchmark yields only have to widen by 12bps for the total return of an intermediate dated IG credit to completely evaporate. Overall, we expect to generate excess returns via a combination of tactical trading, positioning in issuers with positive event risk profiles and from the relatively high carry on the portfolio (weighted average yield is currently c.4.5%). Avoiding single name landmines will be critical in a low-spread environment: we believe that we have the necessary credit skills within the team to reduce idiosyncratic risk within the portfolio. We believe that such an active stock picking strategy will generate a superior total return to a passive long only strategy. Figure 5: Negative returns are only a small wobble away…
Source: Citi Research
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 4
Performance Contribution Global Shipping Lease (GSL 9.875% November 2022) appears atop of the leader board for November with a positive contribution of +8bps following an equally strong showing in the previous month. We took advantage of volatile markets to increase our holding in GSL and we benefited from the subsequent recovery in the bond price towards the end of the month. We like the security package supporting these notes which include a fixed charge over a portfolio of containerships (we believe that the bonds are comfortably covered on a going concern basis, while we estimate a recovery value of c.75 cents using a scrap valuation for the vessels) and a cash sweep mechanism that requires the company to pay down a significant amount of debt every year out of cash flow and retained cash balances. For a more detailed review of the structure please see last month’s newsletter. Rig 6.375% December 2021 (“Rig”) was another notable performer contributing +5bps to fund performance. Bonds continue to find support from an attractive cash carry profile (yield to maturity: 5.8%) and from the near term possibility of a tender at a decent premium to current secondary levels (these notes are non-call for life with a make whole provision set at Treasuries +50bps) given the notes high coupon cost (8.375%, including +200bps coupon step-up). The company indicated on its last results call that it would like to refinance its 2020 and 2021 notes - having recently refinanced its 2017 and 2018 maturities - with a new secured loan to reduce its interest bill and to extend its debt maturity profile. We like the credit profile of Rig which benefits from a backlog of $13.3bn of high margin contracts (pro-forma for the Songa acquisition), a strong liquidity profile (total $5.7bn, including cash of $2.7bn and an undrawn RCF of $3bn), and a focused fleet strategy. Turning to the negative side of the ledger. The largest detractor was TALKLN 5.375% January 2022 (“Talk Talk”) with a negative contribution of -7bps (Talk Talk is the leading provider of value for money internet services in the UK). Bonds fell following a weaker than expected set of H1 2017/18 results. However, KPI trends were more encouraging with the company adding 46k subscribers and fibre net additions about to 89k in Q2. The group also reported a reduction in churn, from 1.5% to 1.3%. The balance sheet remains sound (reported net leverage of c. 2.8x) and the company benefits from adequate liquidity (the company has £222m in undrawn facilities and £56mn in available cash). We remain comfortable holding this low BB telco credit on a bid yield of around 5.8% because while its recent numbers were disappointing, KPIs are improving and management seems to be focused on growing its subscriber base. SHODFP 7.75% November 2022 (“Shop Direct”) was another UK name that generated a disappointing performance for the month, with a negative contribution of -6bps. Shop Direct is the UK’s second largest non-food e-retailer and leading unsecured credit provider. The company’s recent Q1FY18 results - reported early in December – were robust with the top-line growing 1.9%. The 10.2% growth rate for its “Very” brand – growing ahead of non-food online segment - more than offset the managed decline for its Littlewoods brand (-12.4%). Gross margin improved by +60bps to 42.1% driven mainly by a positive foreign exchange translation impact and a lower bad debt charge (down 0.1% to 2.1%). Reported EBITDA was up 19.7% to £37.6mn compared with Q1FY17. Debt increased marginally YOY because of higher capital expenditure but pro-forma leverage remained manageable at 2.3x. We believe that these results demonstrate the strength of the online business model and we remain comfortable holding Shop Direct 5-year £ bonds on a yield of c.9% Two US telecom companies appear on the underperformers list. The first is FTR 9.25% July 2021 (“Frontier Communications”) which made a negative contribution of -6bps. The company reported inline Q317 sales and moderately higher EBITDA at the beginning of the month. However management downgraded guidance for Q417 EBITDA to $920mn (but this is still above consensus of $909mn) from prior guidance of $950mn. The market initially reacted favourably to the numbers but then sold off on the back of a reassessment of EBITDA guidance and disappointment that the company didn’t scrap the dividend. While we were encouraged by the results and the improved KPIs for the acquired CTF assets, management’s failure to address our concerns about the wisdom of continuing to pay a dividend ($265mn for FYE17) given its heavy redemption profile was very disappointing. Following a reassessment of our thesis for this investment we elected to cut our exposure to FTR: the subsequent 5 point fall in the bond price justifies this decision. S 7.25% September 2021 (“Sprint”) made a negative contribution of -5bps. Bond and equity markets reacted negatively to the news that Sprint’s parent, Softbank, had decided to call off merger talks with TMUS, owed by Deutsche Telekom. A merger would have improved Sprint’s credit profile; hence the market’s disappointment about the end of these merger talks. We were obviously disappointed about the news but nonetheless remain comfortable holding standalone Sprint sub-4 year paper on a yield of c.5.2%. Finally BOPRLN 5.25% July 2019 (“Boparan”) made a negative contribution of -5bps. Boparan bonds sold off after the company reported a disappointing set of Q4FY17 numbers that showed continuing margin pressure resulting from higher commodity prices. What was equally disappointing was the drag over of costs related of the “chicken hygiene scandal” into Q2 (November 2017-Jan 2018), we expected this cost to largely run-off in Q1. We exited Boparan after reviewing our thesis for this investment. Our main concern is the inflationary and cost headwinds the company is expected to face over the coming 1-2 quarters. We believe that Boparan’s bonds will remain volatile because we expect the H1FYE18 results to remain weak, while the company remains vulnerable to further negative headlines (hygiene and further avian flu outbreaks in Europe). Furthermore, the company’s recent Q1 results (reported in early December) revealed that earnings within the company’s Branded division fell sharply. This makes any sale of Fox's biscuits even less likely, in our view. We are likely heading towards re-financing concerns over the January 2019 RCF, and £250m of July 2019 bonds. We exited the bonds ahead of the recent Q1 release. Fund Developments Next year MiFID2 comes into effect. This EU-wide regulatory change will mean that ACBF will have to start to pay banks for their research services from the beginning of January 2018. We will endeavour to keep external research costs to a minimum. Finally, may we take the opportunity to wish all our investors and readers a very happy Christmas and a prosperous 2018! We thank all of our investors for their continued support. Written by Lee Robinson & Philip Crate
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 5
Risk Report* (since management restructuring) Drawdown
Gross Summary Statistics Since management restructuring: Jan 2016
ACBF UCITS Annualised Volatility Downside Deviation*
+1.65%
Skewness
-0.69
+1.43%
Kurtosis
4.68
Min 1D Return
-0.55%
Max 1D Return
+0.45%
Max Drawdown
-1.20%
Sharpe Ratio
2.56
November 2017 Annualised Volatility Skewness
+2.15%
ACBF UCITS Strategy Histogram of Daily Returns Since management Restructuring
-0.01
Kurtosis
1.38
Min 1D Return
-0.28%
Max 1D Return
0.33%
Max Drawdown
-1.17%
Sharpe Ratio **
-0.85
Correlation with S&P 500: 1 Month
+0.54
3 Month
+0.23
All
+0.24
*Using Gross Daily Performance Data **Strategy figure shows the performance of ACBF UCITS (since 05/2014 launch). Please refer to Appendix I – Strategy performance graph and risk report since fund inception
Market Cap (USD mm) / Sector Avg Market Cap (USD mm)
% NAV
Basic Materials
Sector
4,538
5.1%
Communications
11,702
13.6%
Consumer, Cyclical
1,075
3.5%
Consumer, Non-cyclical
7,620
5.0%
Energy
3,751
3.6%
Financial
3,550
3.4%
Industrial
4,514
7.1%
Total
6,501
41.3%
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 6
Portfolio Overview Sector Exposure 1
Consumer, Cyclical
15.23%
6
Energy
6.24%
2
Communications
15.07%
7
Consumer, Non-cyclical
5.87%
3
Industrial
9.94%
8
Utilities
3.67%
4
Financial
8.81%
5
Basic Materials
6.91%
Top Ten Countries
Top Issuers
1
United Kingdom
29.74%
1
MARKIT ITRX EUROPE 12/22
6.75%
2
United States
10.55%
2
MATALAN FINANCE PLC
4.08%
3
France
7.76%
3
SOLOCAL GROUP
3.75%
4
Netherlands
7.16%
4
GLOBAL SHIP LEASE INC
3.58%
5
ITRX Tel
3.81%
5
TRAVELEX FINANCING PLC
3.29%
6
India
3.14%
6
VEDANTA RESOURCES PLC
3.14%
7
Luxembourg
2.85%
7
MARKIT ITRX EUR XOVER 12/22
2.93%
8
UAE
2.60%
8
JAGUAR LAND ROVER AUTOMO
2.68%
9
Zambia
1.96%
9
SHELF DRILL HOLD LTD
2.60%
10
Sweden
1.81%
10
PREMIER FOODS FINANCE
2.51%
Top 10
35.31%
Top 20
57.05%
Top 35
72.96%
Rest
2.15%
Duration
Portfolio Duration
0 to 1
39.86%
Modified Duration
0.95
1 to 2
21.97%
Credit
0.68
2 to 3
10.51%
Bonds
3 to 4
18.71%
Sovereign Futures
0.00
4 to 5
-9.15%
Corporate Derivatives
-0.80
5 to 6
-1.12%
Interest Rates
0.27
6 to 7
0.00%
Bonds
0.27
Sovereign Futures
0.00
Corp Derivatives
0.00
Yield Range Table Yield
1.48
Ratings
< 12 months to maturity
12-24 months to maturity
> 24 months to maturity
0 to 4%
0.11%
0.35%
0.18%
BBB-
4.67%
B+
18.61%
4 to 6%
0.17%
0.45%
1.39%
BB+
4.73%
B
43.97%
6 to 8%
0.00%
0.48%
0.98%
BB
2.52%
B-
9.42%
8 to 10%
0.00%
0.00%
0.46%
BB-
8.61%
NR
0.17%
>10%
0.21%
0.19%
-0.13%
WAY (Weighted average yield):
+4.8%
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 7
Appendix I – Strategy performance graph and risk report since fund inception ACBF (subsequently ACBF UCITS) vs. benchmarks 1.23 1.21 1.19 1.17 1.15 1.13 1.11 1.09 1.07 1.05 1.03 1.01 0.99 0.97 0.95 Jan/13 Apr/13
Jul/13
Oct/13 Jan/14 Apr/14
Jul/14
Altana Corporate Bonds Fund UCITS
Oct/14 Jan/15 Apr/15 HF Credit Index
Jul/15
Oct/15 Jan/16 Apr/16
Jul/16
Altana Corporate Bonds Fund
Oct/16 Jan/17 Apr/17
Jul/17
Oct/17
BAML Global Investment Grade Index
Risk Report* Daily Returns
Gross Summary Statistics Since Inception of the Fund: 15 May 2014
ACBF UCITS Annualised Volatility Downside Deviation*
+4.42%
Skewness
-0.89
Kurtosis Min 1D Return
+3.08%
9.55 -1.99%
Max 1D Return
+1.75%
Max Drawdown
-14.78%
Drawdown
ACBF UCITS Strategy Histogram of Daily Returns Since Launch
*Using Gross Daily Performance Data For any further information, please contact [email protected].
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 8
Disclaimer: This report is prepared by Altana Wealth Limited (“Altana”) , which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (FRN: 532912). The Altana Corporate Bond Fund (“ACBF”) is managed by Altana Wealth Limited and is a Sub-Fund of Altana UCITS Funds Plc an investment company with variable capital incorporated with limited liability in Ireland with registered number 540012 and established as an umbrella fund with segregated liability between sub-funds pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities).collective investment in transferable securities under Directive 2009/62/EC. The Fund is a recognised scheme for the purposes of section 264 the Financial Services and Markets Act 2000 of the United Kingdom. Most of the protections provided by the United Kingdom regulatory system, and compensation under the United Kingdom Financial Services Compensation Scheme, will not be available. The contents of this factsheet are directed only at persons who would be defined as Professional Clients and Eligible Counterparty clients under the rules of the FCA rules. The services provided by Altana are only available to persons classified as Professional Clients and Eligible Counterparties (as defined in the FCA rules). As such, no reliance should be placed on anything contained in this factsheet by persons other than Professional Clients and Eligible Counterparty clients. In particular, persons who are Retail Clients (as defined in the FCA rules), should not act or rely upon the information provided in this factsheet and the services referred to herein will not be available to such persons. They are advised to contact their Financial Adviser. This factsheet is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. It is the responsibility of every person reading this factsheet to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. This document does not constitute an offer to sell, solicit or buy any investment product or service, and is not intended to be a final representation of the terms and conditions of any product or service. The investments mentioned in this document may not be suitable for all recipients and you should seek professional advice if you are in doubt. Clients should obtain legal/taxation advice suitable to their particular circumstances. This document may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Although information in this document has been obtained from sources believed to be reliable, Altana does not represent or warrant its accuracy, and such information may be incomplete or condensed. All estimates and opinions in this document constitute our judgment as of the date of the document and may be subject to change without notice. Altana will not be responsible for the consequences of reliance upon any opinion or statement contained herein, and expressly disclaims any liability, including incidental or consequential damages, arising from any errors or omissions. The value of investments and the income derived from them can fall as well as rise, and you may not get back the amount originally invested. Past performance is no indicator of future performance. Investment products may be subject to investment risks, including but not limited to, currency exchange and market risks, fluctuations in value, liquidity risk and, where applicable, possible loss of principal invested. The information contained in this document is merely a brief summary of key aspects of the Fund. More complete information on the Fund can be found in the prospectus or key investor information document. These documents constitute the sole binding basis for the purchase of Fund units. Issued by Altana Wealth December 2017.
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 9
€ / ALTCBAE ID
$ / ALTCBOU ID
£ / ALTCBCG ID
November 2017
-0.45%
-0.29%
-0.38%
YTD
+3.22%
+5.00%
+3.90%
Portfolio Manager & Chief Investment Officer: Lee Robinson
Joint - Portfolio Manager: Philip Crate
NAV (since inception): € 97.71
Fund AUM: € 32,681,881
Fund Strategy The objective of the Altana Corporate Bonds Fund (ACBF) is to generate a positive return in all market phases by investing in a diversified portfolio of corporate bonds globally. The fund sources attractive bond investment opportunities in all major markets, seeks corporations that have an extremely high degree of repayment as well as strong defendable business models. Risks on macroeconomic, geopolitical, sector and issuer levels are limited by following a structured allocation strategy. ACBF takes global exposure either via cash bond positions or derivatives, depending on relative valuations and market opportunities.
As of end of November 2017
Annualised returns 3M YTD 1Y
1M ACBF Strategy
Volatility 1Y ITD
ITD
Sortino
Sharpe Ratio 1Y ITD
Ratio
1Y
(€ class)
-0.45%
0.90%
3.22%
3.54%
1.91%
1.59%
4.42%
2.23
0.43
3.45
HF Credit Index BAML Global IG
-0.25%
0.38%
3.23%
3.57%
1.54%
1.67%
2.43%
2.14
0.64
3.68
-0.10%
0.28%
4.67%
5.47%
3.54%
2.46%
2.94%
2.22
1.20
4.01
ACBF (since management restructuring) vs. benchmarks 1.12 1.11 1.10 1.09 1.08 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1.00 0.99 0.98 0.97 0.96 Jan/16
Return (source: Bloomberg) Per
Mar/16
May/16
Jul/16
Sep/16
Nov/16
Altana Corporate Bonds Fund UCITS
Jan/17
Mar/17
May/17
HF Credit Index
Jul/17
Sep/17
Nov/17
BAML Global Investment Grade Index
Fund
Percentile
1 Mo
-0.48
32%
3 Mo
0.65
72%
YTD
3.27
86%
1Yr
4.18
84%
3Yr
2.02
85%
5Yr
-
-
5.65
82%
2016
Please refer to Appendix I – Strategy performance graph and risk report since fund inception
Performance (net*) Jan
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
YTD
Return Since Inception
Mar
Apr
-0.19% +0.47%
+0.75%
+1.64%
+0.04% -2.12% +1.71% +0.67% +1.11% +2.37% +0.71% +1.29% +8.68%
2014
-0.25% +1.43%
+1.74%
+0.63%
+2.32% +1.08% -2.94% +0.08% -7.09% -1.65% -0.35% +0.78% -4.20%
2015
+1.21% +4.50%
+0.58%
+2.88%
2016
+0.06% -0.78%
+1.62%
+0.25%
+1.29% -1.98% -2.89% -0.98% -3.66% +1.27% -2.98% -1.75% -2.82% +10.00% +0.12% -0.32% +1.39% +0.89% -0.38% +0.80% +0.95% +0.93% +5.65%
2017
+0.01% +0.44%
-0.19%
+0.83%
+0.88% -0.41% +0.58% +0.19% +0.42% +0.88% -0.45%
2013
Feb
+3.22%
*Performance (% m/m) is net € of all legal, admin, trading and management fees. Latest month/YTD figures are final figures. Data is for ACBF Cayman up to April 2014, as of May 2014 data is for ACBF UCITS. 2014 YTD return is a blended figure between ACBF Cayman and ACBF UCITS. ACBF UCITS May-Dec 2014 return was -7.80%.
Main Performance Contributors Top Performers
Bps
Worst Performers
Bps
1
GSL 9.875 11/15/22 144A
+8
1
TALKLN 5.375 01/15/22
-7
2
RIG 6.375 12/15/21
+5
2
SHODFP 7.75 11/15/22 REGS
-6
3
AAFFP 0 10/01/23 REGS
+3
3
FTR 9.25 07/01/21
-6
4
BBDBCN 4.75 04/15/19 REGS
+3
4
S 7.25 09/15/21
-5
5
ABGSM 1.5 03/31/23 REGS
+2
5
BOPRLN 5.25 07/15/19 REGS
-5
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles| Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 1
Portfolio Activity & Outlook Performance Review Welcome to the final newsletter for 2017! November was a tricky month for credit investors to navigate and this is reflected in our performance. The Altana Corporate Bond Fund (“ACBF”) generated a negative performance (net of fees) of -45bps in November (USD$ and GBP share class net returns of -0.29% and -0.38%, respectively), which is broadly in line with our peers and with the negative returns reported for the broader BAML credit indices (when adjusted for fees). ACBF YTD is +3.22% (USD$ and GBP share class net returns of +5.00% and +3.90%, respectively). We are pleased to report that ACBF remains in the top 15% of performers YTD and over a 3-year period according to recent Bloomberg data (up to 4 December 2017). While November was a much more mixed month performance-wise for risk assets, it will likely be best remembered for the S&P 500 delivering a 13th consecutive month of positive total returns which puts it at the longest streak ever. Indeed it has now eclipsed the runs of 12 months seen in 1935-36 and 1949-50. The index ended the month +3.1% which is actually the third strongest month in this record breaking run. With it also positive every month in 2017 it now has the opportunity to finish a calendar year for the first time ever with a positive return every month should we see more of the same in December. A late month surge for US financials (+3.5%) seemingly around positive tax reform progress and possible looser regulation was a large contributor to the broader index performance and overshadowed a more volatile month for tech stocks in particular which appeared to suffer from some profit taking and sector rotation. European equity markets were down in local currency terms, albeit slightly positive in USD terms as a result of the stronger Euro (+2.2%). Some of the notable moves include the DAX (-1.6%, +0.6%), Stoxx 600 (-2.0%, +0.2%) and FTSE MIB (-1.6%, +0.5%). Elsewhere, US government bond returns during the month were fairly muted (+0.1%) while European government bond markets were generally flat in local currency terms and up low single digits in USD terms. This included Bunds (-0.1%, +2.1%), Gilts (+0.3%, +2.1%) and BTPs (+0.6%, +2.8%). Credit markets were similarly muted although this included a ‘mini’ sell-off for HY midway through the month. Figure 1: Total Return Performance of Major Global Financial Assets – November 2017 (local currency)
Source: Deutsche Bank, Bloomberg Finance LP, Markit
The sell-off in European single-B names and for the Crossover CDS index was triggered by a gap down in French telecom’s conglomerate Altice bond price (down c.5-8 points across USD and EUR) and by a dramatic 40 point fall in bond price for Astaldi, an Italian construction company – we don’t hold either name in the portfolio. Telecom names also contributed to weakness in US HY lower too following the negative price action for Altice, Frontier Communications, and Sprint. The latter’s bond price fell on average by c.4 points following the breakdown of its merger talks with TMUS (more detail below). However, it didn’t take long for the market to recoup most of these losses and HY finished the month down around -40bps compared with an intra-month low of c.-85bps. Overall, DM investment grade credit finished the month down around -30bps, with Europe underperforming slightly given the negative return seen for Bunds. We selectively reduced single-B risk and the portfolio’s beta over the course of the month. Market Outlook We remain constructive towards European credit going into 2018 given the continued support afforded by the ECB’s Corporate Sector Purchase Programme (“CSPP”) and by an improving European economic outlook. Credit valuations should also be supported by a low default rate. With fundamentals remaining in good shape and continued support for fixed income from central banks it has not been surprising that default rates have remained (and will continue to remain) historically low. In Figure 2, we show the relationship between lending standards and default rates for both Europe and the US. It can be observed that defaults tend to react to changes in lending standards with around a four quarter lag. Looking at the recent lending standards data it seems likely that default rates will remain low for another year given the easing bias over the past year or so. This should be supportive for valuations, especially lower down the credit spectrum. At this stage of the cycle we prefer to be long credit rather than duration.
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 2
Figure 2: European (LHS) and US (RHS) Lending Standards vs. Default Rates
Source: Deutsche Bank, ECB, Federal Reserve, S&P
A more negative risk view comes from the US yield curve. At the moment the Fed dots price in three 25bp rate rises for 2018 even if the market prices in only 40bps. At the end of October 2015, two months before the first US rate hike in over 9 years, US 2 year yields were around 0.60%. Since then both Fed Funds and 2 year yields have risen around 100bps to 1.35% and 1.80% respectively. Meanwhile 10 year Treasuries are only around 25bps higher leaving the 2s10s curve flattening from around 145bps to c.53bps today. Obviously the yield curve is influenced by many variables but if the Fed did hike three times in 2018 (plus 25bps in December 2017) and the relationship held from the last 2-years of this Fed hiking cycle then we could see 2-year yields up 75-100ps with 10-years only around 20-25bps higher. As such the 2s10s yield curve could end up being closer to flat by YE2018 under a reasonable scenario. If the market saw the Fed making a policy mistake (rightly or wrongly) or if global fixed income demand still held back 10-year yields from rising in their normal cyclical manner then it’s not impossible to envisage a slightly more aggressive scenario where the yield curve inverts in 2018. The reason we would be concerned is that we still think that the yield curve is a good predictor of animal spirits and the business/asset price cycle. We still think that a flat yield curve would leave investors more reluctant to invest in carry trades as the risk/reward becomes less and less compelling. At the moment in a low yield world there is enough of a positive slope on global yield curves for carry to still be attractive. However the 2s10s curve in the US is already more than c.70bps flatter than the local peak in the early days of the Trump Presidency and c.200bps flatter than it was at the start of 2014. We don’t have as much ‘wiggle room’ for the curve to flatten further before concerns mount and therefore there is more risk of a Fed policy error. Figure 3: US 2s10s slope and recessions shaded
Source: Deutsche Bank, Bloomberg Finance LP
So what does this all mean for credit markets? In the near-term we actually think credit spreads could tighten as crosswinds look light in Q1 and the recent widening entices investors back into credit despite relatively tight valuations. Q1 will likely also see evidence that CSPP hasn’t been tapered much relative to PSPP. As such this could mark a fresh round of optimism about the technicals in European credit and hence Q1 could mark the best point of the credit cycle in the absence of external shocks (e.g., the US yield curve flattens (or indeed invert) over a perceived policy error by the Fed or by concern about a more severe Chinese economic slowdown). We believe that the market may start to become more challenging entering Q2, as we leave the perfect scenario of non-inflationary growth and high central bank support behind us. We’ll also likely start to see markets price in the end to the various ECB programmes as Q2 progresses. With yields as low as they are and with credit spreads towards the tighter end of their historic range, next year’s total return expectations for European credit next is relatively low, with most investment banks projecting nothing more than a “coupon clipping” year for HY (total return of c.2.5%). Meanwhile, European IG is expected to generate a flat to slightly negative total return based on the less than stellar return expectations for Bunds in 2018 (estimated total return of -1% and -2.8% for 5 and 10-year, respectively). While valuations for IG seem optically less stretched compared to HY, we are becoming more watchful of higher investment and M&A driven supply given the improvement in economic growth. This could mean less supportive technicals for European IG in the coming year after another year of muted net supply thanks to ECB purchases. Not the most exciting return outlook, we agree. However, we believe that smaller funds like ACBF with strong credit and tactical trading skills stand to benefit from any increase in volatility in the year ahead. Now let’s return to one of the major themes for credit markets in 2018; namely the contraction in central bank balance sheets. In Figure
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 3
4 we show the rolling 12 month central bank balance sheet size from the big four DM central banks over the last few years and likely path over the next two. Figure 4: Rolling 12 month balance sheet changes from the big 4 central banks
Source: Deutsche Bank, Haver, ECB, Federal Reserve, Bank of Japan, Bank of England
The combined size of the Fed, ECB, BoJ and BoE balance sheets has expanded to around $14.9trn which represents an increase of $1.8trn relative to the end of 2016. However, looking forward it’s almost certain that 2018 will represent a changing of the guard for ultra-easy policy. As of October 2017 the Fed has begun (albeit gradually) the process of unwinding its balance sheet, the ECB has announced that it will further taper the growth of its balance sheet in January (although the impact of reinvestments will somewhat buffer this move), the BoE recently raised its benchmark interest rate for the first time in a decade and the BoJ is purchasing less now given its focus on controlling the yield curve rather than targeting a set monthly amount. Assuming fairly neutral and consensus assumptions, central bank balance sheet growth will fall sharply over the next 12-24 months from the peak levels currently seen. Meanwhile we think the risks to inflation are on the upside. A combination of the two will likely mean that crosswinds pick up as we move through Q2 and into H2 – a period where US inflation might start to more consistently beat on the upside (or at least not consistently miss on the downside) and markets start to think about a June ECB meeting where the end of Euro QE is possibly announced. How will ACBF respond to these upcoming challenges? We will continue to focus on short duration secondary opportunities where there is a positive near term catalyst. We will also increase exposure towards short-dated US and EM IG credit given its relatively more attractive risk/return compared to European IG and single-B credit. The fund will remain conservatively positioned towards € IG duration exposure given unattractive break-yields. Figure 5 highlights the very small margin of error for € IG credit: on average credit spreads and/or benchmark yields only have to widen by 12bps for the total return of an intermediate dated IG credit to completely evaporate. Overall, we expect to generate excess returns via a combination of tactical trading, positioning in issuers with positive event risk profiles and from the relatively high carry on the portfolio (weighted average yield is currently c.4.5%). Avoiding single name landmines will be critical in a low-spread environment: we believe that we have the necessary credit skills within the team to reduce idiosyncratic risk within the portfolio. We believe that such an active stock picking strategy will generate a superior total return to a passive long only strategy. Figure 5: Negative returns are only a small wobble away…
Source: Citi Research
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 4
Performance Contribution Global Shipping Lease (GSL 9.875% November 2022) appears atop of the leader board for November with a positive contribution of +8bps following an equally strong showing in the previous month. We took advantage of volatile markets to increase our holding in GSL and we benefited from the subsequent recovery in the bond price towards the end of the month. We like the security package supporting these notes which include a fixed charge over a portfolio of containerships (we believe that the bonds are comfortably covered on a going concern basis, while we estimate a recovery value of c.75 cents using a scrap valuation for the vessels) and a cash sweep mechanism that requires the company to pay down a significant amount of debt every year out of cash flow and retained cash balances. For a more detailed review of the structure please see last month’s newsletter. Rig 6.375% December 2021 (“Rig”) was another notable performer contributing +5bps to fund performance. Bonds continue to find support from an attractive cash carry profile (yield to maturity: 5.8%) and from the near term possibility of a tender at a decent premium to current secondary levels (these notes are non-call for life with a make whole provision set at Treasuries +50bps) given the notes high coupon cost (8.375%, including +200bps coupon step-up). The company indicated on its last results call that it would like to refinance its 2020 and 2021 notes - having recently refinanced its 2017 and 2018 maturities - with a new secured loan to reduce its interest bill and to extend its debt maturity profile. We like the credit profile of Rig which benefits from a backlog of $13.3bn of high margin contracts (pro-forma for the Songa acquisition), a strong liquidity profile (total $5.7bn, including cash of $2.7bn and an undrawn RCF of $3bn), and a focused fleet strategy. Turning to the negative side of the ledger. The largest detractor was TALKLN 5.375% January 2022 (“Talk Talk”) with a negative contribution of -7bps (Talk Talk is the leading provider of value for money internet services in the UK). Bonds fell following a weaker than expected set of H1 2017/18 results. However, KPI trends were more encouraging with the company adding 46k subscribers and fibre net additions about to 89k in Q2. The group also reported a reduction in churn, from 1.5% to 1.3%. The balance sheet remains sound (reported net leverage of c. 2.8x) and the company benefits from adequate liquidity (the company has £222m in undrawn facilities and £56mn in available cash). We remain comfortable holding this low BB telco credit on a bid yield of around 5.8% because while its recent numbers were disappointing, KPIs are improving and management seems to be focused on growing its subscriber base. SHODFP 7.75% November 2022 (“Shop Direct”) was another UK name that generated a disappointing performance for the month, with a negative contribution of -6bps. Shop Direct is the UK’s second largest non-food e-retailer and leading unsecured credit provider. The company’s recent Q1FY18 results - reported early in December – were robust with the top-line growing 1.9%. The 10.2% growth rate for its “Very” brand – growing ahead of non-food online segment - more than offset the managed decline for its Littlewoods brand (-12.4%). Gross margin improved by +60bps to 42.1% driven mainly by a positive foreign exchange translation impact and a lower bad debt charge (down 0.1% to 2.1%). Reported EBITDA was up 19.7% to £37.6mn compared with Q1FY17. Debt increased marginally YOY because of higher capital expenditure but pro-forma leverage remained manageable at 2.3x. We believe that these results demonstrate the strength of the online business model and we remain comfortable holding Shop Direct 5-year £ bonds on a yield of c.9% Two US telecom companies appear on the underperformers list. The first is FTR 9.25% July 2021 (“Frontier Communications”) which made a negative contribution of -6bps. The company reported inline Q317 sales and moderately higher EBITDA at the beginning of the month. However management downgraded guidance for Q417 EBITDA to $920mn (but this is still above consensus of $909mn) from prior guidance of $950mn. The market initially reacted favourably to the numbers but then sold off on the back of a reassessment of EBITDA guidance and disappointment that the company didn’t scrap the dividend. While we were encouraged by the results and the improved KPIs for the acquired CTF assets, management’s failure to address our concerns about the wisdom of continuing to pay a dividend ($265mn for FYE17) given its heavy redemption profile was very disappointing. Following a reassessment of our thesis for this investment we elected to cut our exposure to FTR: the subsequent 5 point fall in the bond price justifies this decision. S 7.25% September 2021 (“Sprint”) made a negative contribution of -5bps. Bond and equity markets reacted negatively to the news that Sprint’s parent, Softbank, had decided to call off merger talks with TMUS, owed by Deutsche Telekom. A merger would have improved Sprint’s credit profile; hence the market’s disappointment about the end of these merger talks. We were obviously disappointed about the news but nonetheless remain comfortable holding standalone Sprint sub-4 year paper on a yield of c.5.2%. Finally BOPRLN 5.25% July 2019 (“Boparan”) made a negative contribution of -5bps. Boparan bonds sold off after the company reported a disappointing set of Q4FY17 numbers that showed continuing margin pressure resulting from higher commodity prices. What was equally disappointing was the drag over of costs related of the “chicken hygiene scandal” into Q2 (November 2017-Jan 2018), we expected this cost to largely run-off in Q1. We exited Boparan after reviewing our thesis for this investment. Our main concern is the inflationary and cost headwinds the company is expected to face over the coming 1-2 quarters. We believe that Boparan’s bonds will remain volatile because we expect the H1FYE18 results to remain weak, while the company remains vulnerable to further negative headlines (hygiene and further avian flu outbreaks in Europe). Furthermore, the company’s recent Q1 results (reported in early December) revealed that earnings within the company’s Branded division fell sharply. This makes any sale of Fox's biscuits even less likely, in our view. We are likely heading towards re-financing concerns over the January 2019 RCF, and £250m of July 2019 bonds. We exited the bonds ahead of the recent Q1 release. Fund Developments Next year MiFID2 comes into effect. This EU-wide regulatory change will mean that ACBF will have to start to pay banks for their research services from the beginning of January 2018. We will endeavour to keep external research costs to a minimum. Finally, may we take the opportunity to wish all our investors and readers a very happy Christmas and a prosperous 2018! We thank all of our investors for their continued support. Written by Lee Robinson & Philip Crate
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 5
Risk Report* (since management restructuring) Drawdown
Gross Summary Statistics Since management restructuring: Jan 2016
ACBF UCITS Annualised Volatility Downside Deviation*
+1.65%
Skewness
-0.69
+1.43%
Kurtosis
4.68
Min 1D Return
-0.55%
Max 1D Return
+0.45%
Max Drawdown
-1.20%
Sharpe Ratio
2.56
November 2017 Annualised Volatility Skewness
+2.15%
ACBF UCITS Strategy Histogram of Daily Returns Since management Restructuring
-0.01
Kurtosis
1.38
Min 1D Return
-0.28%
Max 1D Return
0.33%
Max Drawdown
-1.17%
Sharpe Ratio **
-0.85
Correlation with S&P 500: 1 Month
+0.54
3 Month
+0.23
All
+0.24
*Using Gross Daily Performance Data **Strategy figure shows the performance of ACBF UCITS (since 05/2014 launch). Please refer to Appendix I – Strategy performance graph and risk report since fund inception
Market Cap (USD mm) / Sector Avg Market Cap (USD mm)
% NAV
Basic Materials
Sector
4,538
5.1%
Communications
11,702
13.6%
Consumer, Cyclical
1,075
3.5%
Consumer, Non-cyclical
7,620
5.0%
Energy
3,751
3.6%
Financial
3,550
3.4%
Industrial
4,514
7.1%
Total
6,501
41.3%
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 6
Portfolio Overview Sector Exposure 1
Consumer, Cyclical
15.23%
6
Energy
6.24%
2
Communications
15.07%
7
Consumer, Non-cyclical
5.87%
3
Industrial
9.94%
8
Utilities
3.67%
4
Financial
8.81%
5
Basic Materials
6.91%
Top Ten Countries
Top Issuers
1
United Kingdom
29.74%
1
MARKIT ITRX EUROPE 12/22
6.75%
2
United States
10.55%
2
MATALAN FINANCE PLC
4.08%
3
France
7.76%
3
SOLOCAL GROUP
3.75%
4
Netherlands
7.16%
4
GLOBAL SHIP LEASE INC
3.58%
5
ITRX Tel
3.81%
5
TRAVELEX FINANCING PLC
3.29%
6
India
3.14%
6
VEDANTA RESOURCES PLC
3.14%
7
Luxembourg
2.85%
7
MARKIT ITRX EUR XOVER 12/22
2.93%
8
UAE
2.60%
8
JAGUAR LAND ROVER AUTOMO
2.68%
9
Zambia
1.96%
9
SHELF DRILL HOLD LTD
2.60%
10
Sweden
1.81%
10
PREMIER FOODS FINANCE
2.51%
Top 10
35.31%
Top 20
57.05%
Top 35
72.96%
Rest
2.15%
Duration
Portfolio Duration
0 to 1
39.86%
Modified Duration
0.95
1 to 2
21.97%
Credit
0.68
2 to 3
10.51%
Bonds
3 to 4
18.71%
Sovereign Futures
0.00
4 to 5
-9.15%
Corporate Derivatives
-0.80
5 to 6
-1.12%
Interest Rates
0.27
6 to 7
0.00%
Bonds
0.27
Sovereign Futures
0.00
Corp Derivatives
0.00
Yield Range Table Yield
1.48
Ratings
< 12 months to maturity
12-24 months to maturity
> 24 months to maturity
0 to 4%
0.11%
0.35%
0.18%
BBB-
4.67%
B+
18.61%
4 to 6%
0.17%
0.45%
1.39%
BB+
4.73%
B
43.97%
6 to 8%
0.00%
0.48%
0.98%
BB
2.52%
B-
9.42%
8 to 10%
0.00%
0.00%
0.46%
BB-
8.61%
NR
0.17%
>10%
0.21%
0.19%
-0.13%
WAY (Weighted average yield):
+4.8%
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 7
Appendix I – Strategy performance graph and risk report since fund inception ACBF (subsequently ACBF UCITS) vs. benchmarks 1.23 1.21 1.19 1.17 1.15 1.13 1.11 1.09 1.07 1.05 1.03 1.01 0.99 0.97 0.95 Jan/13 Apr/13
Jul/13
Oct/13 Jan/14 Apr/14
Jul/14
Altana Corporate Bonds Fund UCITS
Oct/14 Jan/15 Apr/15 HF Credit Index
Jul/15
Oct/15 Jan/16 Apr/16
Jul/16
Altana Corporate Bonds Fund
Oct/16 Jan/17 Apr/17
Jul/17
Oct/17
BAML Global Investment Grade Index
Risk Report* Daily Returns
Gross Summary Statistics Since Inception of the Fund: 15 May 2014
ACBF UCITS Annualised Volatility Downside Deviation*
+4.42%
Skewness
-0.89
Kurtosis Min 1D Return
+3.08%
9.55 -1.99%
Max 1D Return
+1.75%
Max Drawdown
-14.78%
Drawdown
ACBF UCITS Strategy Histogram of Daily Returns Since Launch
*Using Gross Daily Performance Data For any further information, please contact [email protected].
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 8
Disclaimer: This report is prepared by Altana Wealth Limited (“Altana”) , which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (FRN: 532912). The Altana Corporate Bond Fund (“ACBF”) is managed by Altana Wealth Limited and is a Sub-Fund of Altana UCITS Funds Plc an investment company with variable capital incorporated with limited liability in Ireland with registered number 540012 and established as an umbrella fund with segregated liability between sub-funds pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities).collective investment in transferable securities under Directive 2009/62/EC. The Fund is a recognised scheme for the purposes of section 264 the Financial Services and Markets Act 2000 of the United Kingdom. Most of the protections provided by the United Kingdom regulatory system, and compensation under the United Kingdom Financial Services Compensation Scheme, will not be available. The contents of this factsheet are directed only at persons who would be defined as Professional Clients and Eligible Counterparty clients under the rules of the FCA rules. The services provided by Altana are only available to persons classified as Professional Clients and Eligible Counterparties (as defined in the FCA rules). As such, no reliance should be placed on anything contained in this factsheet by persons other than Professional Clients and Eligible Counterparty clients. In particular, persons who are Retail Clients (as defined in the FCA rules), should not act or rely upon the information provided in this factsheet and the services referred to herein will not be available to such persons. They are advised to contact their Financial Adviser. This factsheet is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. It is the responsibility of every person reading this factsheet to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. This document does not constitute an offer to sell, solicit or buy any investment product or service, and is not intended to be a final representation of the terms and conditions of any product or service. The investments mentioned in this document may not be suitable for all recipients and you should seek professional advice if you are in doubt. Clients should obtain legal/taxation advice suitable to their particular circumstances. This document may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Although information in this document has been obtained from sources believed to be reliable, Altana does not represent or warrant its accuracy, and such information may be incomplete or condensed. All estimates and opinions in this document constitute our judgment as of the date of the document and may be subject to change without notice. Altana will not be responsible for the consequences of reliance upon any opinion or statement contained herein, and expressly disclaims any liability, including incidental or consequential damages, arising from any errors or omissions. The value of investments and the income derived from them can fall as well as rise, and you may not get back the amount originally invested. Past performance is no indicator of future performance. Investment products may be subject to investment risks, including but not limited to, currency exchange and market risks, fluctuations in value, liquidity risk and, where applicable, possible loss of principal invested. The information contained in this document is merely a brief summary of key aspects of the Fund. More complete information on the Fund can be found in the prospectus or key investor information document. These documents constitute the sole binding basis for the purchase of Fund units. Issued by Altana Wealth December 2017.
©2017 Private & Confidential | [email protected] | www.AltanaWealth.com Altana Wealth Ltd | 8 Pollen Street | London W1S 1NG | Tel: +44 (0) 20 7079 1080 | Authorised and regulated by the Financial Conduct Authority Altana Wealth SAM | 33 Avenue St Charles | Monaco 98000 | Tel: +377 97 70 56 36 | Authorised and regulated by the Commission de Contrôle des Activités Financières 9
